Tax
Buy-Sell Agreements After Connelly: Why Company-Owned Life Insurance Raises Your Estate Tax Value
Connelly put company-owned life insurance inside your company's estate tax value. What that does to buy-sell agreements, and how owners are repapering them.
By 409.AI Team - 2026-08-13
# Buy-Sell Agreements After Connelly: Why Company-Owned Life Insurance Raises Your Estate Tax Value
Michael and Thomas Connelly ran a building supply company in St. Louis, and they did what tens of thousands of closely held businesses do. They signed an agreement: when one brother died, the survivor could buy his shares, and if the survivor passed on that right, the company itself had to redeem them. To make sure the money would be there, the company bought $3.5 million of life insurance on each brother.
Michael died in 2013. The company collected the insurance and paid his estate $3 million for his 77.18% stake. The estate then filed a return valuing the whole company at $3.86 million, treating the insurance money as a wash because it was already committed to the buyout.
The IRS added the $3 million back. That put the company at $6.86 million, Michael's shares at roughly $5.3 million, and the estate on the hook for another $889,914 in tax. On June 6, 2024, a unanimous Supreme Court sided with the government in [Connelly v. United States](https://www.supremecourt.gov/opinions/23pdf/23-146_i42j.pdf).
Two years on, a lot of buy-sell agreements still read exactly the way Crown C Supply's did.
What the Court actually held
The decision does two things, and only the first one gets quoted.
First, life insurance proceeds payable to a corporation are a corporate asset on the date of death, the same as cash in the operating account. Nobody seriously fought that part.
Second, and this is where the estate lost, the company's obligation to redeem the deceased owner's shares is not a liability that cancels out the asset. Justice Thomas, writing for the Court, worked through the logic on a stripped down example, and it's easy to run your own. Picture a company whose only asset is $1 million in cash, owned equally by two shareholders. Each 50% stake is worth $500,000. If the company redeems one of them for $500,000, the survivor is left owning all of a company worth $500,000. His economic position hasn't moved. A redemption at fair value shuffles who owns what, it doesn't destroy value, so it isn't a debt that shrinks the company for valuation purposes.
Run that logic on Crown C Supply and the answer falls out. A hypothetical buyer of the entire company on the day Michael died would have paid for the $3 million sitting in the bank. So the estate had to as well.
The part almost everyone skips
There's a second lesson buried in the procedural history, and for most owners it's the more useful one.
A buy-sell agreement *can* fix the value of shares for estate tax purposes. That's been true since the regulations under Section 2031 recognized it in 1958, and [Section 2703](https://www.law.cornell.edu/uscode/text/26/2703) later added conditions: the agreement has to be a bona fide business arrangement, it can't be a device to pass the business to family for less than full value, and its terms have to be comparable to what unrelated parties would sign. Underneath all of that sits a more basic requirement. The agreement has to actually produce a price.
Crown's didn't. It offered two routes to a number: the brothers could sign an annual Certificate of Agreed Value, or they could commission appraisals. They never signed a certificate. They never ordered an appraisal. When Michael died, the $3 million figure came out of a conversation, not the document. The Eighth Circuit called the certificate mechanism what it was, an agreement to agree, and held that nothing in the contract fixed or prescribed a price. By the time the case reached the Supreme Court, nobody was still arguing that the agreement controlled the value.
So the brothers had a buy-sell agreement that looked airtight and set no price at all. If your own agreement calls for an annual valuation and the last one in the file is from four years ago, you're in the same position: you don't have a price, you have a plan to produce one someday.
What this costs, with numbers
Take two owners, 50/50, running a company an appraiser would value at $12 million on its operations alone. The company holds a $6 million policy on each of them and the agreement says it redeems the deceased owner's half.
One owner dies. The company collects $6 million and pays the estate $6 million, which is exactly half of $12 million and feels like the deal everyone signed up for.
For estate tax, the company is worth $18 million that day. The decedent's half is $9 million before any discounts. The family banked $6 million and gets taxed on $9 million. At the 40% top estate tax rate, that gap adds about $1.2 million of tax to an estate that already spent its liquidity buying nothing.
The obvious objection is the exemption. In 2026 the basic exclusion is $15 million per person, made permanent by the One Big Beautiful Bill Act, and plenty of owners look at that and stop reading. We wrote about how that number works in [gifting startup equity under the 2026 exemption](https://409.ai/articles/gifting-startup-equity-2026-estate-tax-exemption). Three things keep Connelly alive anyway.
State estate taxes come first. Oregon starts taxing estates at $1 million and Massachusetts at $2 million, and neither number is indexed. A Connelly adjustment can push a business owner across those lines without changing a dollar of what the family receives.
Second, the business is rarely the whole estate. Add a house, a retirement account, and a second property, and the extra few million of phantom company value is what tips the total over the federal line.
Third, even below every threshold, the mismatch matters for the owners who are still alive. If the agreement's price is stale, the family gets shortchanged on the buyout and the survivors get a windfall, or the reverse. That's the fight that ends up in front of a judge.
There is one direction the ruling cuts in the taxpayer's favor. A higher date-of-death value raises the heirs' basis in the stock under Section 1014, which can be worth real money for an estate comfortably under the exemption. It's a consolation prize, not a plan, and it's worth asking your tax adviser to model rather than assuming.
The structures owners are moving to
The Court was blunt that the outcome followed from how the brothers set things up, and pointed out they could have arranged a cross-purchase instead, while noting that arrangement has costs of its own. That's the menu practitioners have been working from since.
In a cross-purchase, each owner personally owns a policy on the others and buys the shares directly. The proceeds never touch the company, so there's nothing to add to its value. The catch is arithmetic. Two owners need two policies; five owners need twenty. Premiums get paid with personal after-tax dollars, and owners of different ages carry very different costs.
Insurance LLCs and special purpose partnerships exist to solve that headcount problem by holding the policies in one entity outside the operating company. Irrevocable life insurance trusts do related work on the personal side.
Some companies are keeping the redemption structure and simply sizing the insurance with the tax effect priced in, buying enough to fund the buyout *and* the additional estate tax it triggers.
One warning that applies to all of it: moving an existing policy into a new structure can run into the transfer-for-value rule in Section 101(a)(2), which turns part of an otherwise tax-free death benefit into ordinary income unless the transfer fits an exception. Employer-owned policies have their own notice and consent requirements under Section 101(j). This is counsel-and-CPA territory, not a weekend project, and the [AICPA's Tax Adviser walkthrough of Connelly](https://www.thetaxadviser.com/issues/2024/nov/connelly-clarifies-estate-treatment-of-stock-redemption/) is a reasonable thing to hand them.
What the valuation side has to deliver
Whatever structure you land on, the agreement needs a valuation process that runs whether or not anyone remembers to run it.
That means naming the standard of value and the appraiser in the document, setting a deadline, and stating what happens if the deadline slips. Revenue Ruling 59-60, still the IRS framework for valuing closely held stock, lists the factors an appraiser is expected to weigh: the company's history, the industry outlook, book value, earning capacity, dividend capacity, goodwill, prior sales of stock, and prices of comparable public companies.
In practice, that resolves into the same methods behind any credible private company valuation. Operating businesses usually lean on earnings and on the [market approach](https://409.ai/articles/market-approach-409a-valuation), while holding companies and asset-heavy entities are better served by the [asset-based approach](https://409.ai/articles/asset-based-approach-409a-valuation), which is also the lens that makes the Connelly result so hard to argue with. Minority interests carry discounts for lack of control and for [lack of marketability](https://409.ai/articles/discount-lack-marketability-dlom-409a-valuation), and those discounts are exactly what the IRS tests hardest on audit, so they need support rather than a rule of thumb. If you've never read a valuation report closely, our [section-by-section walkthrough](https://409.ai/articles/decoding-a-409a-valuation-report-walkthrough) covers what should be in one.
Worth saying plainly: a 409A valuation is not an estate tax valuation. Both are fair market value exercises and they share machinery, but they answer different questions for different regulators, and the [difference between a 409A and a general FMV opinion](https://409.ai/articles/409a-valuation-vs-fair-market-value) is the kind of thing that gets discovered at the worst moment. If your buy-sell needs a number, get a valuation scoped for [buy-sell and ownership changes](https://409.ai/products/smb-valuation). If an estate or gift filing needs one, get a [gift and estate tax valuation](https://409.ai/products/gift-estate-tax) built for Form 706 or 709 scrutiny.
Where to start this week
Pull the buy-sell agreement out of the file and look for two things. First, the most recent executed valuation certificate or appraisal. If the newest one predates your last three good years, the price in that agreement is fiction and the IRS is not bound by it. Second, who owns the policies. If the answer is the company, do the arithmetic on your own numbers: add the death benefit to the appraised value, take the decedent's percentage of the total, and compare it to what the agreement would actually pay out.
If those two figures are far apart, you've found the problem Connelly created, and you found it while everyone is still alive to fix it.